As I write this the Nikkei is down 580.52 points to 7,880.36.  All of Asia is down across the board.  A sea of red you might say.  It will be interesting to see what happens with the European markets once they open.  I imagine if Asia is down so will be Europe.  None of the fundamentals have changed.

There are various people who are quite knowledgeable that see a reversal in the markets, but I just don’t see it.  If the dollar declines in value, which is on the horizon commodities will probably once again increase in value.  However, we are in a major contraction, with the severity of the recession increasing on a daily basis, which bodes ill for the equity markets.  

Toyota’s sales are down for the first time in seven years reports Bloomberg <article>.  We aren’t just seeing a slowdown in the USA, we are seeing a worldwide contraction.  A recent article in IBD (Investors Business Daily) showed workers outside a toy factory in China protesting for their overdue paychecks.  China the unstoppable growth machine is slowing drastically because demand is falling off a cliff for their exports.  People are consuming fewer items, and banks are hoarding cash.  The entire system is coming to a standstill.  

What amazes me is the rate at which this entire process of de-leveraging, credit constipation, and economic contraction is taking place.  It was only a year ago or so when banks started showing signs of cracking and the markets started their descent.  At every turn there have been reassurances that everything is okay, but it has all been a smoke screen.  I wonder if tomorrow will be the day that will never be forgotten.  

So far we have seen major market swings in the all the equity markets.  Speaking solely of the US markets they tend to go down about 7-8% on a really bad day, which is nothing compared to the 20+% in 1978 on Black Monday.  All in all this decline has been somewhat orderly until we hit the latest consolidation phase where the markets are still moving down, but primarily sideways.  

A beautiful triangle formed, which was recently broken if you follow the charts.  It formed in the Dow, Nasdaq, S&p500, and Russell 2000.  Many believe that the rebound from the 23rd (today) started the next leg up, but I think as many others do that we might (this is hopeful) see a bounce to the underside of the triangle and then a complete meltdown (not hopeful).  

For the worst credit crisis in history the markets really could continue down much further.  All the indicators indicate that the market is oversold and ripe for a bounce.  However, the same was said with the ascent from 1997-2007.  Indicators help with market sentiment and direction, but are no means the definitive measure of what is happening.  At times of extreme volatility and uncertainty indicators may need to be readjusted or ones perception of them need be readjusted.

Let’s say you are a trader and do quite well in makets that are trending either up or down.  However, the markets start consolidating and move sideways.  All of a sudden your gains start to be erroded by your losses.  Why?  How could this happen?  The adept trader would shift their trading style to accomodate the new trend, which is sideaways and no longer trending.  The faithful would keep trading as they would in a trending market, which at the end of the day loses them money.

What happened?  The faithful was unable to see that their system was broken given the new market conditions.  Now it works beautifully given certain macro conditions, but if you system isn’t modified when those conditions change then you are in for a world of hurt.

How many people alive today went through the Great Depression and crash of 1929?  I sure didn’t, and the few who were alive are quite old and few.  Unless you are a student of history, and able to visualize what really happened I think we all may be in for a major shock.  Panic and distaste for the markets has yet to set in.  We may be at act 2 of how many I don’t know.